The Importance of Equity

by Priti Ramjee; Updated September 26, 2017

You can never have too much equity whether it's in your home or in your business. The importance of equity in business, is the value after all debts are paid. On a financial balance sheet or personal net worth statement, equity is shown as the difference between your assets and liabilities. The more equity you have, the higher your value in your business and personal affairs.

Growth

As the value of your home increases, so does the price, thereby, increasing equity in the property. Similarly, as your business sales increase, the equity increases as well. Foryour business and personal lives, the importance of equity is in the growth of your assets, by sales or by property value. The more equity you have, the less debt to be repaid, hence, the more comfortable your life will be today and in the future.

Value

The importance of having your own equity in your business is to attract equity investors for cash flow. Your repayment to an equity investor is based on the company's growth and profit, rather than immediate repayment of debt as with a bank loan. According to Ernst & Young, the value private equity investors create in businesses is seen at the time they exit their investment showing: a track record of improved profits, growth and cash flow from growth in contracts.

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Opportunities

The growth and equity potential in a company are important in securing an equity investor. An investor looks for opportunities to build equity in a company for private equity investments. Projects are limited compared with the higher demand for equity financing, which makes investors selective about their investment choices. The investor's knowledge of the business, an existing relationship with the owners, and a management team and business model in place, are attractive for investment for an equity investor than those at a planning stage.

Sources

Friends, relatives and investors are sources of equity investments, important in helping you build equity. An equity investor seeks opportunities to invest in homes or companies with increasing value which reduces your debt. He may also provide counseling services for the growth of your business. Friends and relatives are sources of personal loans, which are not expected to be repaid immediately thereby, reducing your personal debt.

Warning

Building equity for personal or business growth is important to reducing your debt. Be committed to avoiding debt financing through bank loans as an option available for raising capital. Debt financing reduces equity by imposing a repayment burden and subjects you to penalties on payment defaults. Funds raised through equity financing does not entail any immediate repayment obligation.